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The easiest way to secure higher mutual fund returns is to keep fees low, because they come off the top. On a $1 million portfolio that earns 5% a year, a tiny 0.10% fee saps $16,000 in returns over a decade. There are stock funds that cost less than 0.05% a year, but according to the Investment Company Institute, the average investor pays 0.79%, suggesting plenty of room for savings.

The absolute lowest-cost approach isn't always the best one, however, because in some situations, active fund managers can reliably earn their pay. Better to use a balance of broad frugality and targeted splurging.

Consider the case of a 45-year-old investor socking away a $1 million windfall. Overwhelmed by the choices of how to divvy the cash among asset classes, he defers to the American Association of Individual Investors and its portfolio models, found at AAII.com/asset-allocation. He chooses moderate risk, which calls for 70% in stocks (including 20% apiece in large and midsize companies; 10% small; 15% international; and 5% emerging markets) and 30% in intermediate bonds.

The lowest-cost route would be to buy index funds from one of a handful of firms that compete fiercely on fees, such as Vanguard, Charles Schwab, and Fidelity, with its Spartan funds. For example, using Schwab's exchange-traded funds for each of those asset classes would cost 0.068%, or $680 per year to start, with no commissions to buy or sell through Schwab. It's a fine choice, but by paying a little more he may be able to do better.

Start with U.S. stocks. The overwhelming majority of fund managers in the category fail to beat their benchmarks' returns in most years, studies show, and picking ones with good past performance doesn't necessarily help. Of 707 funds that were in the top 25% for returns in September 2010, just 10% remained there by September 2012, according to Standard & Poor's. But as Barron's reported last month, many funds stick so closely to their benchmarks that underperformance is all but a sure thing after subtracting fees. Funds that make bold picks, on the other hand, have better records.

For example, the
GoodHaven Fund
(ticker: GOODX) was launched in 2011 by a pair of former managers of the renowned
Fairholme Fund
(FAIRX). Both funds make concentrated bets on deep-value stocks, a strategy that often does much better or worse than the market over short periods but can pay off nicely over long ones. Fairholme, awash in cash, will close to new investors at the end of February. The smaller and nimbler GoodHaven is the better bet in any case. It's off to a fine start, returning 20.4% over the past year, versus 17% for the S&P. Annual expenses are 1.1% with no upfront sales charge. Top holdings recently included
Spectrum Brands HoldingsSPB -1.5391380826737027%Spectrum Brands Holdings Inc.U.S.: NYSEUSD89.56
-1.4-1.5391380826737027%
/Date(1427835913096-0500)/
Volume (Delayed 15m)
:
354134AFTER HOURSUSD89.56
%
Volume (Delayed 15m)
:
2135
P/E Ratio
22.55919395465995Market Cap
4843347221.14838
Dividend Yield
1.4738722644037516% Rev. per Employee
328072More quote details and news »SPBinYour ValueYour ChangeShort position
(SPB), maker of Rayovac batteries, and
Hewlett-PackardHPQ -1.2987012987012987%Hewlett-Packard Co.U.S.: NYSEUSD31.16
-0.41-1.2987012987012987%
/Date(1427835703216-0500)/
Volume (Delayed 15m)
:
13325990AFTER HOURSUSD31.21
0.05000000000000070.16046213093709885%
Volume (Delayed 15m)
:
381387
P/E Ratio
11.714285714285714Market Cap
57380335811.2918
Dividend Yield
2.053915275994865% Rev. per Employee
363454More quote details and news »HPQinYour ValueYour ChangeShort position
(HPQ).

Another option is to bet on a methodology rather than a manager.
PowerShares FTSE RAFI US 1000 PortfolioPRF -0.7392107837808457%PowerShares Exchange Traded Fund FTSE RAFI US 1000 PortfolioU.S.: NYSE Arca91.31
-0.68-0.7392107837808457%
/Date(1427835600210-0500)/
Volume (Delayed 15m)
:
166148
P/E Ratio
N/AMarket Cap
N/A
Dividend Yield
1.2473551637279596% Rev. per Employee
N/AMore quote details and news »PRFinYour ValueYour ChangeShort position
(PRF) is an ETF that weights companies according to financial size as measured by book value, cash flow, sales, and dividends. The index's creators say that's an improvement upon the method used by most stock indexes—weighting companies by stock-market value—because that gives companies more portfolio sway as they become more expensive. The fund has returned 6% a year over the past five years, versus 4.4% for the S&P 500, after fees of 0.39% a year.

Our cost-conscious investor needn't bet the ranch on either approach. Of the $500,000 he's putting in U.S. stock funds, a pair of $50,000 positions in funds like GoodHaven and the PowerShares ETF will raise his fees by about $700 a year to start, and give him a good shot at boosting returns by tens of thousands of dollars over a 20-year investment period.

DFA Emerging Markets Core Equity
(DFCEX) offers something of a compromise. Its screening process gives the portfolio more small and midsize companies. It still gives big weightings to Korea and Taiwan, but on the whole, it offers more exposure to consumer companies and less to multinationals. That puts it closer to the rising middle class in emerging markets. The fund has returned an average of 3.7% a year over the past five years, versus 0.4% for its peer group. And its semi-passive approach keeps costs down; fees are 0.68% a year.

BOND YIELDS ARE SO low that high fees are out of the question. A decade ago the 10-year Treasury yielded 4%. Now it yields half as much. As yields have broadly fallen, bond prices have rallied, and good managers have found it easy to earn their pay. It will be more difficult from here, however. At the same time, bonds continue to provide important diversification against downturns in the stock market. For reluctant buyers,
Vanguard Total Bond Market bnd 0.10806916426512968%Vanguard Total Bond Market ETFU.S.: NYSE Arca83.37
0.090.10806916426512968%
/Date(1427835600037-0500)/
Volume (Delayed 15m)
:
1994420AFTER HOURS83.729
0.3589999999999950.43061053136619887%
Volume (Delayed 15m)
:
P/E Ratio
N/AMarket Cap
N/A
Dividend Yield
2.330737675422814% Rev. per Employee
N/AMore quote details and news »bndinYour ValueYour ChangeShort position
(BND) and
Schwab U.S. Aggregate Bondschz 0.11352885525070956%Schwab US Aggregate Bond ETFU.S.: NYSE Arca52.91
0.060.11352885525070956%
/Date(1427835591745-0500)/
Volume (Delayed 15m)
:
170568
P/E Ratio
N/AMarket Cap
N/A
Dividend Yield
2.023058023058023% Rev. per Employee
N/AMore quote details and news »schzinYour ValueYour ChangeShort position
(SCHZ) at least come cheap. They cost 0.10% and 0.05%, respectively. To add a dash of active management at only moderately higher cost, look to
Fidelity Total Bond
(FTBFX), with fees of 0.45%. Over the past decade it has returned an average of 5.8% a year after fees, versus 5.1% for the Barclays U.S. Aggregate Bond index. The fund can put up to 20% in lower-rated "junk" bonds or emerging-market bonds, which gives it enough flexibility to jump on relative bargains wherever they turn up. Funds devoted exclusively to emerging-market bonds cost 1.3%, on average, and junk bond funds cost an average of 1.2%, making the Fidelity fund a cheap way to sample pricey fare.